January 18, 2005

Decision Making Biases

We humans are not wired to live in modern society. We are wired to live in nomadic packs of 20
people or so, which we did quite successfully for millions of years. The amount of information and the complexity of
our social system is too much to keep track of.

…[consumers shown] the price of an unrelated good (a
sweatshirt that did not interest participants) can affect people’s
willingness-to-pay for the item that interests them (a music CD).

To elaborate on this example, if you saw a series of
sweatshirts for $25, $35, $30… and then saw a CD, the maximum price you would
be willing to pay would be higher than normal. This is a recency bias, since the last price in your mind is $30, which
is higher than the $15 for a CD. What is
fascinating in this research is that the sweatshirts and CDs have nothing to do
with each other -- they are unrelated goods! How sad are we as a species?

A similar effect is called the anchoring effect. The first price proposed in a negotiation
generally has the effect of “anchoring” the conversation around that
price. This is a very common tactic in sales
and negotiations. For example, this is
why those uber-salespeople who star in infomercials -- of whom Ron Popeil is the
undisputed king (fascinating profile of him by Malcolm Gladwell here) -- always
use “the countdown.” They anchor their
audience with a higher price, which has the tendency to increase consumers
willingness to pay. A typical pitch
(this one from Gladwell’s article):

"You're not going to spend two hundred dollars, not a
hundred and eighty dollars, not one-seventy, not one- sixty . . ." It's a
standard pitchman's gimmick: it sounds dramatic only because the starting price
is set way up high.

All of this is just further evidence that consumer marketing
professional are really just armchair psychologists trying out new hypothesis on
us unsuspecting humans. I’m going to go
forage in my fridge for a beer.

(just came across some other interesting posts on decision making biases here)